In its opening salvo bringing bitcoin under the watchful eye of the federal government, the Financial Crimes Enforcement Network (FinCEN) issued a Guidance (FIN-2013-G001) in March 2013 clarifying that anti-money laundering regulations concerning record keeping and recording apply to digital currency exchanges. Under this initial guidance, a bitcoin exchange that allows users to buy bitcoin with real currency and sell bitcoin for real currency must file as a money services business (MSB) as defined under the Bank Secrecy Act (BSA) with FinCEN (but a user who simply obtains virtual currency and uses it to purchase real or virtual goods or services would not be subject to FinCEN regulations).

Yesterday, FinCEN issued two additional rulings that answer questions submitted by two companies seeking guidance on whether they must register as MSBs and be subject to the accompanying reporting, recordkeeping and monitoring requirements. These rulings are important in further clarifying the scope of its initial March 2013 guidance.

In FIN-2014-R011, “Request for Administrative Ruling on the Application of FinCEN’s Regulations to a Virtual Currency Trading Platform,” one company asked whether its plans to set up a virtual currency trading and booking platform would make it subject to FinCEN regulations. Specifically, the company’s plan involved a trading system to match offers to buy and sell convertible virtual currency for real currency anonymously among the platform’s customers (inter-account transfers or payments from customer accounts to third-parties would be prohibited). In response, the agency ruled that such a trading platform would be considered an MSB:

A person that accepts currency, funds, or any value that substitutes for currency, with the intent and/or effect of transmitting currency, funds, or any value that substitutes for currency to another person or location if a certain predetermined condition established by the transmitter is met, is a money transmitter under FinCEN’s regulations.” […] The Company is facilitating the transfer of value, both real and virtual, between third parties.

The method of funding the transactions is not relevant to the definition of money transmitter. An exchanger will be subject to the same obligations under FinCEN regulations regardless of whether the exchanger acts as a broker (attempting to match two (mostly) simultaneous and offsetting transactions involving the acceptance of one type of currency and the transmission of another) or as a dealer (transacting from its own reserve in either convertible virtual currency or real currency). Therefore, FinCEN finds that the Company is acting as an exchanger of convertible virtual currency, as that term was described in the Guidance.

In FIN-2014-R012, “Request for Administrative Ruling on the Application of FinCEN’s Regulations to a Virtual Currency Payment System,” another company asked whether a proposed convertible virtual currency payment system for the hotel industry that accepted customers’ credit card payments and transferred the payments to the merchants in the form of bitcoin (presumably to avoid substantial foreign exchange risks in Latin America) would make the company a MSB. Under such a payment system, the merchants would be paid using the company’s own large reserve of bitcoins. FinCEN responded that if the company sets up such a payment system, the company would be a money transmitter and subject to regulations because “it engages as a business in accepting and converting the customer’s real currency into virtual currency for transmission to the merchant.”

The agency further stated:

The fact that the Company uses its cache of Bitcoin to pay the merchant is not relevant to whether it fits within the definition of money transmitter. An exchanger will be subject to the same obligations under FinCEN regulations regardless of whether the exchanger acts as a broker (attempting to match two (mostly) simultaneous and offsetting transactions involving the acceptance of one type of currency and the transmission of another) or as a dealer (transacting from its own reserve in either convertible virtual currency or real currency).

As the bitcoin ecosystem matures and new business models develop, the reach of federal anti-money laundering regulations may be unclear in certain circumstances.

Jeffrey Neuburger is co-head of Proskauer’s Technology, Media & Telecommunications Group, head of the Firm’s Blockchain Group and a member of the Firm’s Privacy & Cybersecurity Group.

Jeff’s practice focuses on technology, media and intellectual property-related transactions, counseling and dispute resolution. That expertise, combined with his professional experience at General Electric and academic experience in computer science, makes him a leader in the field.

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